THE BUSINESS REVIEW FOR PROCUREMENT LEADERS
Jittery commodity markets and geopolitical instability give CPOs the chance to show real business leadership
by Jason Busch
Douglas Macarthur, supreme commander of Allied Forces throughout the Asian theatre in World War II, and architect of post-war reconstruction and modern-day democracy in Japan, once said: “There is no security on this earth – only opportunity.” While there is no doubt that the stakes were higher during World War II than for procurement and supply chain organisations in peacetime today, General MacArthur’s statement could easily sum up an optimist’s view when it comes to managing today’s volatile commodity and geopolitical supply markets.
From significant swings in non-ferrous metals prices (mostly up, rather than down) in the past two years to the shortening cycles of stability and then instability in the Middle East, there has not been a more unpredictable business and economic climate in recent memory.
With the market environment the way it is – and the direction it appears to be headed – the ability to manage through such volatility has never been more important. This requires not only new skills within the supply management function, but also the know-how to take advantage of the right types of technology and third-party information. But, perhaps most important, procurement leaders also need to adopt a more global perspective on business and the role of sourcing and procurement within it.
The good news is that just as IT groups came to own the systems and information management challenge – generating a new base of power and influence inside many companies – procurement and operations professionals now stand to own an increasingly important and large piece of enterprise risk management tied to commodity and market volatility – if they play their cards right.
Adopting a risk management perspective to procurement and global supply chains does not only mean embracing a philosophy simply of controlling any potential downside. It also entails better quantification and understanding of opportunities. For example, consider raw “commodity inputs” such as copper, nickel or even skilled offshore IT labour. Analysing the willingness of a procurement organisation to float the price of underlying commodity elements through the duration of a contract by not locking into fixed pricing with its direct providers – or hedging pricing on a market-traded index – is obviously a first-level priority. But if an organisation is more advanced, it might consider a broader risk management strategy that looks at price volatility, and appropriate strategies, throughout an extended supply chain.
In the case of metals, analysis might dictate a strategy that locks in a large percentage of cost for forecast demand for tier-one and tier-two suppliers, but shows the flexibility to float, or even speculate on, a certain percentage of price volatility on the remaining spread between actual demand and un-contracted supply. More advanced organisations might even learn to separate out all of the base elements that go into supply commodity pricing (eg, raw material content, stockholding, logistics) and look for areas where suppliers are mispricing elements of an underlying contract, taking advantage of the lack of pricing sophistication in their supply base.
Some companies might even tie their sell-side analysis to their buy-side, understanding the percentage of upside and downside risk and cost they can pass on to customers, quantifying acceptable degrees of risk and opportunity by uniting both analyses. This type of thinking does not only apply to the sourcing of direct materials and commodity price inputs; it can hold for indirect and services spend too. Understanding the direction of regional economic factors, as well as labour costs and infrastructure capacity in the process of conducting analyses for offshoring, might dictate that “hot regions” like India present more downside than upside risk for new areas of exploration (unless, of course, the bet is on a regional provider with global capabilities, rather than regional labour alone).
Above all, the key for procurement professionals when it comes to actively managing volatility is a willingness to educate the rest of the business about the risk and opportunities it faces in today’s environment. Only through active internal marketing will C-suite executives and P&L owners come to understand that procurement – rather than finance, IT or other functions – represents the front line of the battle to maximise returns and minimise risk.
As General MacArthur observed, even if there will never be tranquility, it’s
still possible to turn volatility into opportunity – especially when
your constituents back you with the charter and support you need to succeed.
Jason Busch (jbusch@azulpartners.com) is MD of Azul Partners in Chicago and author of the blog spendmatters.com spendmatters.com
